Treasury wants mortgage principal reductions on taxpayers’ dime

Despite opposition from much of the financial industry, the U.S. Treasury Department forged ahead with a plan to offer American homeowners principal reductions on their mortgages, CNBC reported.

In a major expansion announced late last week of its Home Affordable Modification Program, the Treasury will increase incentives to lenders who offer principal reductions, paying up to 63 cents on the dollar for those reductions. It also opened up the option to Fannie Mae and Freddie Mac.

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The money would come from taxpayer contributions to TARP funds. These measures come in addition to the principal forbearance and easier refinancing policies President Barack Obama outlined in his State of the Union address.

“Clearly the initial program erred on the side of making sure taxpayers were protected, but it didn’t do enough to help the overall economy,” said Michael Barr, former assistant Treasury Secretary for Financial Institutions and one of HAMP’s original architects.

CNBC said the TARP-funded principal reductions were a direct response to Federal Housing Finance Agency Director Ed DeMarco’s arguments against that such measures would cost the government-supported lenders $4 billion. Now that the Treasury has found funding for the moves though, it is forcing DeMarco’s hand. CNBC sources speculated that if DeMarco continues to hold Freddie and Fannie out of the program, the Obama administration could be emboldened to replace him. [CNBC]